Steel companies sell their products on spot steel prices or under long-term supply agreements. In its Flat-Rolled segment, U.S. Steel Corporation (X) sells almost 75% of its produce on contract pricing. AK Steel Holding (AKS) has one of the highest percentages of contract sales in its sales mix. On previous occasions, AKS has also highlighted lower contract pricing as a headwind for 2016. ArcelorMittal (MT) has also said that lower spot prices tend to impact contract pricing as well.
The graph above shows the spot versus contract breakdown of U.S. Steel’s different segments. In its earnings call for 3Q15, company management said that almost two-thirds to three-quarters of these contracts would be rolled over on January 1, 2016. Unfortunately, steel prices and market sentiment were pretty negative at the beginning of the year. This could mean that supply contracts could have been rolled over at lower prices.
However, this does not mean the end of the road for U.S. Steel. In the Flat-Rolled segment, 20% of U.S. Steel’s supply contracts have a quarterly reset while 13% of shipments have a monthly adjustment. Still, 32% of U.S. Steel’s Flat-Rolled shipments are firm, which might not get reset with further changes in steel prices.
Notably, 32% of U.S. Steel’s spot shipments in fiscal 2015 were in the spot market. These sales should gain from rising spot steel prices in the United States (VTI). We should also note that U.S. Steel faces both risks and opportunities in 2016. (You can read Analysts Have Conflicting Opinions about US Steel to explore this in detail. You can also read Has U.S. Steel Corporation Run Ahead of its Fundamentals? to learn more about U.S. Steel’s soaring valuations.)